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Gold, Oil, and Forex

Posted August 31st, 2009 by Administrator

Gold, Oil and the foreign currency exchange market are three different markets that are intertwined. If you are into Forex trading, knowing what one does may give you an insight where the other markets may be heading. It would be greatly advantageous to become familiar with those different markets as a trader and get some Forex education.

Let’s have a look at those separate markets and how they are all connected.

There is an inverse correlation for markets such as gold or oil that are priced in U.S. dollars in the finance world. When the U.S. dollar drops, not only do foreign currencies go up, but gold prices also increase. Studies have shown a negative correlation between gold and the dollar that is, they almost never move in together, but almost always move in reverse directions.

The value of EUR/USD versus gold prices, on the other hand, shows a very high positive correlation, this means that the value of the euro and gold prices often go hand-in-hand, suggesting these markets are both better off when funds are flowing away from the U.S. dollar.

Gold prices may be considered as an important indicator in the analysis of the forex market. A trend change in gold price may give a good clue to where the US dollar may be heading in the foreign exchange market.

A jump in crude prices directly relates to a weakness in the USD. Foreign oil producers view the increase in oil prices as a way to maintain their buying power in U.S. dollar terms. Forex brokers will tell you to counter the impact of higher oil prices a weaker dollar could ultimately give rise to inflation.

Oil is a key commodity causing global economic growth, and oil prices and the foreign exchange have a key relationship in the global market.

Now lets have a look at the impact an increase in the oil price may have on the different major currencies around the world.

Japan: Economy suffers as it relies on imports for most of its energy needs, therefore the Yen weakens.

UK: Benefit the economy as UK produces oil. British pound strengthens.

Oil in world business has a heavy impact on the Forex market. Thus any disturbance in supply is likely to affect the foreign exchange market.

Some of these factors may be terrorist attacks, natural disasters and wars. In such circumstances a shift from the dollar to the euro as the designated currency in crude oil could occur thus causing an immediate drop in the value of the U.S. dollar.

Gold and oil are not the only commodities affected by changes in forex rates. Exports of agricultural commodities account for a large share of U.S. farm income.

When the value of the dollar rises, it tends to limit buying interest from an importing nation as the commodity becomes too expensive in terms of that nation’s domestic currency.

When the value of the dollar declines, it reduces the price to an importing nation in terms of its currency and encourages it to buy more U.S. agricultural products.

The influence that one market has on another market naturally shifts over time so these relationships are not static but should be the subject of ongoing study.

You as a Forex trader should be aware of the impact that those different markets have on the Forex. Though the changes may not be instantaneous, it may however give you an insight on any possible trend changes in the near future.  Happy trading. BSFT220409


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